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RGI Newsletter

Insurers Are Moving From Risk Response to Risk Prevention through Digital Transformation

Digital technologies such as analytics and complex-event processing give P&C and life insurers a platform that enables them to better understand risk, and help their customers manage it. CIOs must build IT agility that enables insurers to shift from risk management to risk prevention.

Key Findings

  • As the industry embraces digitalization, innovative business and IT leaders in both property and casualty (P&C) and life insurance companies are adopting strategies to make the transition from risk management to risk prevention.
  • Technology innovation – especially the Internet of Things (IoT), predictive modeling and advanced analytics – is laying the foundation for establishing policyholder risk prevention programs.
  • Consumer data shows early signs of consumers' acceptance of risk prevention programs and the value derived from their insurers offering them information to avoid risks – and, therefore, claims.
  • The IT requirements for risk prevention programs are complex and large-scale, and CIOs must immediately begin to build a bimodal, agile and real-time IT landscape for complex-event processing.

Key Recommendations

Life and P&C insurance CIOs should:

  • Work with business partners to evaluate the opportunities for risk prevention, and identify the underlying business and technology changes that are needed to fulfill this model.
  • Assess the analytical capabilities to support real-time risk prevention modeling. Determine whether you have sufficient data sources, and access to enterprise data, analytical tools and modeling competencies, to support this business strategy.
  • Build an IT roadmap to support complex-event processing through a combination of analytics, business process management (BPM), service-oriented architecture (SOA) and real-time customer front ends.
  • Establish bimodal IT capabilities around process orchestration and customer communications in order to support real-time outbound and interactive communications with customers.

Analysis

The Business-Critical Shift from Risk Management to Risk Prevention

The insurance industry has historically been founded on being reactive: Once a claim occurs, it is the insurer's job to manage it and get payment to the policyholder or service providers in an expedited fashion. This model has served the industry in the past, but will not suffice in the digital insurance marketplace, where consumer insurance needs are changing and the things that are insured (for example, vehicles, homes and other property, and people) are becoming more connected as a result of the growing adoption of the Internet of Things (IoT). For this reason, Gartner expects insurance business leaders worldwide to shift their business strategies from risk response to risk prevention through 2020. Risk prevention will be a new risk management approach for the industry, enhancing traditional risk management approaches (acceptance, avoidance, mitigation and transfer of risks). We define risk prevention as:

  • The identification of insurance policyholder risks (for example, car accidents, personal injury, death or property losses) through advanced analytics, especially predictive modeling.
  • Leveraging claims and underwriting risk information by the insurer to launch risk prevention programs, including the sharing of risk information with the policyholder. This will ensure that both the insurer and the policyholder are aware of the factors that contribute to the specific claims risk, and the actions that can be taken to either mitigate the likelihood of risk occurrence or reduce the material loss from a specific risk (through information distribution aimed at loss prevention or behavior modification).

Risk prevention will encompass the entire insurance value chain, including improved risk assessment during underwriting and predictive modeling for claims loss prevention. Although in the past this strategy has been implemented by insurers in commercial P&C and workers compensation product lines (it is often called "loss prevention"), most lines of business have not yet done risk modeling using new data sources (for example, IoT sensors), or rolled out customer engagement models that would provide this information to policyholders with the goal of improving risk prevention. This is a significant change from current business practices, and will inherently change the nature of insurance in the future.

The risk prevention model is quite easy to comprehend: the prevention of claims via improved monitoring, analytical modeling and behavioral modification through the sharing of risk information to the insured before a claim happens. Scenarios include:

  • Providing driving feedback from automotive telematics sensors to a customer via a portal or mobile app, to highlight unsafe driving patterns (for example, speeding or hard braking)
  • Explaining the impact of behaviors such as smoking and exercise on life expectancy during the life insurance application process
  • Using wearable devices to provide feedback on health risks
  • Providing real-time weather alerts to home and auto customers, so that they can take preventative measures to reduce losses due to a weather event
  • Creating real-time appliance alerts for the connected home (for example, reporting that the stove has been left on, causing a fire risk, or that the main water main to the house has burst)

In all these scenarios, the insurer can prevent losses, which both translates into a financial gain for the insurer and helps the consumer avoid loss of property or even life. It is a win-win strategy for both.

Innovators in the industry are already building these strategies and beginning their transformation to risk prevention. For example, Maurice Tulloch of Aviva recently stated, "The future of insurance is prevention. Aviva is already using technology for the benefit of its customers by preventing risks from happening in the first place, whether that's stopping water leaks or encouraging safer driving."1 Gartner predicts that more business and IT leaders in insurance will follow this path and embrace risk prevention as a core tenet of their digital transformation strategies.

Digital Transformation Is Enabling Risk Prevention

The insurance industry is evolving quickly, due to technological advances in sensors, connected technology, communications technology, social media, and analytics. Among the most important developments are:

  • Today, real-time data can be collected from an insured object (for example, via a connected home, connected car, telematics sensor or wearable device). This data can be mined and compared against historical data to evaluate risk, as is typically done in underwriting, but in a more precise and real-time manner.
  • Customers are now easier to reach. They are tied to more communications channels, such as social media, that insurers can use to send real-time alerts.
  • Analytics has moved from batch to real-time processing, allowing insurers to build risk models that are deployed continuously, reducing the time from event detection to risk notification. There are also more predictive technologies available on the market that will allow companies to forecast risks, as opposed to simply reporting on them, as is in the case with traditional historical business intelligence solutions.
  • More data on risk is available to the insurer. The IoT is just one part of this equation. Insurers have access to social media data, public data and other forms of risk data (for example, geocoding, weather, vehicle defects and disease). All of this data can be leveraged to build more robust analytical models to determine future risks.
  • BPM technologies and customer communications management technologies provide a platform for insurers to put alerts into action. An alert can be instantly sent through the processing hub, evaluated for the best outbound messaging option (depending on the customer's preference), and then sent without human intervention.

Combined, these technologies have the potential to enable a new business model and relationship with policyholders through more frequent interaction and active loss prevention. Insurers have struggled for many years to determine how to build loyalty with their policyholders, and have been searching for new ways to reinvent their businesses to facilitate this model. The maturing of these technologies provide the platform for insurers to introduce new business processes and customer experiences that were impossible before the IoT, BPM and advanced analytics were developed. While some companies, especially P&C insurers, have tried to deploy strategies around active loss prevention, they have typically not worked, due to organization limitations such as lack of customer intelligence or limited analytical power. Risk prevention models extend beyond active loss prevention, however, because they encompass behavioral modification and proactive customer engagement, not just information distribution.

Customers Are Increasingly Willing to Accept This New Role of Insurers in Their Lives

For this new risk prevention model to work, it is critical that policyholders be receptive to the new model and aware of the benefits they can derive from this type of relationship with their insurer. While many insurance business and IT leaders may be reluctant to move in this direction, thinking consumer reaction will be negative, Gartner research shows the opposite. A 2014 Gartner study of insurance consumers' attitudes and behaviors found that 31% of respondents reported a strong desire for more communications about new product offerings that would better suit their individual needs, or for prevention information that would enable them to avoid the need to make claims.2

We are seeing additional signs that this model would be welcomed by many consumers. Each year, more consumers are signing up to be monitored by telematics for auto insurance savings and additional benefits, including loyalty points that can be redeemed for retail purchases (one example is Allstate's Drivewise program), teen driving programs to help parents have visibility into their teenagers' driving habits and car performance insight. Life insurance consumers are also signing up to share wearable device usage information with their life insurers for behavioral monitoring (for example, the life insurance product John Hancock launched in 2015), and consumers are opting in to smart home projects that share home monitoring data with their home insurers.

Over time, more insurance products will be developed that leverage connected device and sensor data to provide added benefits to policyholders, and to provide insurers with a rich dataset that can be used to provide preventative advice to help with risk avoidance and claims reduction. This will not just be a platform for usage-based insurance, but also a platform for risk prevention services that will completely transform the industry. Insurers will not be focused on preventing claims versus paying claims. Claims transformation won't be less of a fundamental requirement and claims processing less costly as volumes reduce. This will result in operational efficiencies that will help the bottom line. Furthermore, the types of claims that will need to be handled will vary significantly, including more risk situations and unavoidable claims, such as catastrophes. Today, claims processing is reported as one of the most costly activities that insurance companies perform. If this activity is reduced, the resulting savings will help reduce operational costs.

Levering IoT with programs like behavioral modification (for example, with consumers educated on risks in order to adjust their behaviors) or through preventive tasks (for example, early alerts on car transmission problems in the car or an alert of a water line break in the home) will be a critical success factor during the next five years. With continued advancements in the IoT, greater value will be identified and new applications developed. Insurance business and IT leaders only have to use their imagination on how they can partner with and leverage these emerging technologies to reduce insurance risks. New partnerships will be required with device manufacturers and data owners (for example, home monitoring companies or automotive manufacturers) in order to fulfill these program requirements.

Risk prevention offers insurers more value than just loss prevention. Insurance companies are struggling today to interact with their customers in new and innovative ways. Many are seeking ways to have more regular contact with their policyholders, and to provide additional services that will enhance customer loyalty and retention. Risk prevention services do just that. They establish a platform for insurers to provide risk information to their policyholders on a more frequent basis, increasing contact and giving them something other than claims or administrative issues to discuss. This will help substantially to improve customer experience management, resulting in greater customer satisfaction overall. This also may set the foundation for new services that can be administrated via the agent/broker. As insurers move to risk prevention, they can leverage their agent/broker channels to provide risk information to their customers, making them more risk managers in the future, versus sales personnel.

While prevention is considered innovative and strategic among many insurers, Gartner has noted resistance to this model by some insurers. These companies fear that reducing claims would injure their relations with policyholders. Claims historically have represented the moment that correlates most closely with policy renewal and longevity of customer relationship. Without claims, some insurers are concerned that they will not show the value of insurance when customers need them the most. While this may be true, Gartner believes that the new value proposition offered through risk prevention programs will overshadow these fears and provide additional value to policyholders – value that is unattainable using today's business models.

The Path to Risk Prevention Needs to Start Now

There are multiple organizational changes, process changes and technology implementations that will need to happen in order to fully execute risk prevention models. Some risk prevention programs are basic, requiring limited data (for example, customer and risk information, and outbound communications preferences in order to send real-time alerts on pending risks). These would be things like catastrophe alerts for weather events. Risk information obtained through partners (for example, weather data) is mined using predictive models, with customers in risk zones identified using policy and CRM data, and alerts sent out using outbound communications systems (for example, customer communications management systems). This is already done by many insurers. For example, a Gartner and Association for Cooperative Operations Research and Development (ACORD) study conducted in 3Q15 found that, in home and auto insurance, approximately 31% of participating insurers reported that they already had an outbound notification system in place to notify policyholders of pending catastrophe or weather conditions. Another 8% of respondents were planning to implement such a system in 2016.3

Beyond this, additional capabilities will be required. For example, new staffing models may be needed as insurers roll out complex behavioral models. Gartner predicts that leading insurers will hire behavioral scientists to focus on behavioral analytics, as well as growing their data science teams. Innovative companies such as Lemonade (a peer-to-peer insurance startup in the U.S.) have already begun hiring for positions such as a chief behavioral officer (for more information, see Insurance Journal's "Startup Lemonade Bets Behavioral Science Can Help Insurance Not Suck"). While this is a new role, initially focused on marketing and the customer experience, it will, over time, extend into behavioral modeling for risk prevention.

On the IT side, as capabilities mature, more complex risk prevention programs can be executed that leverage real-time analytics, business process orchestration through advanced BPM, SOA, IoT and customer-facing technologies such as mobile and portals. CIOs can help set up an IT infrastructure to support complex-event processing, which is crucial in digital business execution. Complex-event processing distills incoming data about events into "complex" events. Complex events summarize the information value of the incoming data to provide insights into current conditions in a company and its environment. Complex-event processing is event-driven because computation is triggered immediately when input data is received. The input data can come from transactional application systems, sensors, social computing systems, market data providers, Web-based news feeds, email systems and other sources. To support this model, CIOs need to ensure that their organization operates in a bimodal business model (that is, able to respond in real time and having the baseline IT capabilities required for risk prevention model execution) and is agile. Building the right IT landscape will be necessary; otherwise, risk prevention strategies will fail as they cannot be executed.

Recommendations:

Life and P&C insurance CIOs should:

  • Work with business partners to evaluate the opportunities for risk prevention, and identify the underlying business and technology changes that are needed to fulfill this model.
  • Assess the analytical capabilities to support real-time risk prevention modeling. Determine whether you have sufficient data sources, and access to enterprise data, analytical tools, and modeling competencies, to support this business strategy.
  • Build an IT roadmap to support complex-event processing through a combination of analytics, BPM, SOA and real-time customer front ends.
  • Establish bimodal IT capabilities around process orchestration and customer communications in order to support real-time, outbound and interactive communications with customers.

Evidence

1Maurice Tulloch Remarks: The Tulloch statement was made in remarks to the Economist Insurance Summit on 25 February 2016.

2Gartner Study of Insurance Consumers: Gartner conducted a consumer study in 2Q14 with a sample of 6,943 consumers between the ages of 18 and 74 in six global markets: Australia, the U.S., Canada, France, Germany and the U.K. This study examined the attitudes, behaviors and preferences among consumers toward P&C insurance and life insurance; 2,341 of the respondents were from North America.

3Gartner/ACORD Survey: The survey was conducted jointly by Gartner and ACORD in June 2015 and July 2015. It was conducted online with ACORD members, and included executives from business and IT. The respondents represented 104 P&C and life insurers: 83 in the U.S., seven in the U.K., four in Canada and 14 in other regions.

Source: Gartner Research Note G00278592, Kimberly Harris-Ferrante, 21 March 2016